MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

The Fed continued to express concern that strongly rising demand will lead to inflationary imbalances. In its post-meeting statement, the Fed said, "The Committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply...Such trends could foster inflationary imbalances that would undermine the economy's record economic expansion."

The Fed also implied that this rate hike will be followed by more rate hikes in the coming months if demand remains at present levels, "Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

Although the Fed has put the markets on notice that further rate hikes are on the way, today's action is unlikely to put a damper on surging consumer demand.

By opting for the safe route of a 25 basis point hike rather than the shock route of a 50 basis point hike, Alan Greenspan & Co risk falling behind the curve.

Demand has accelerated despite three Fed moves, and it is unlikely that the demand-dampening effects of today's rate hike will be sufficient to offset the growth-boosting twin effects of the wealth effect and recovering global economies.

Last week's jitters were but a distant memory, erased by a 200 point surge in the Dow Industrials and a 180 point mid-day swing in the tech laden NASDAQ Composite.  Camera happy analysts immediately proclaimed a bottom, and amateur technicians sang a tune of triumphant bounces off moving averages.

The one day bounce was nice, but did it mark a new beginning?

Tech stars Dell, Microsoft, and Yahoo all held support--a positive.  The Dow and S&P moved back above their 200 day moving averages after their one-day journey to the wrong side of the tracks.  The last time the two averages made a similar bounce, back in mid-October, the rally that ensued surpassed the wildest dreams of even the most devoted bullish momentum traders.  Could a repeat be in store?

With the FOMC's widely anticipated rate hike decision still a day away, but already discounted, the pieces could be in place for a short-term "all pile on board" relief rally--but only if the Fed keeps to the script, notches the ante up 25 basis points, and accompanies its actions with soothing words.

In the unlikely event that the esteemed Fed Chairman decides to break character and goes for 50, the market would temporarily take fright, but here too the damage could be limited if the 50 basis points are accompanied by "a sign" that the end (of the rate hike cycle) is near.

We have a sneaking suspicion however that the Fed has seen the errors of its ways and will accompany its quarter point move with a less than market friendly post-meeting announcement.  After sitting on the Y2K induced sidelines at its last meeting, and watching the caustic circle of surging stock prices and the wealth effect dancing hand-in-hand with surging consumer demand and runaway economic growth, the Fed is unlikely to be in a hospitable mood.

The Fed will likely attempt to prevent a repeat of the stock market's trademarked post-FOMC euphoric stomps to uncharted glory, but it will do so cautiously so as to let the wind out of the market's sails slowly--a policy of caution forced by surging margin debt, record low savings rates, and the less than astute lending practices of many of our esteemed banking institutions.

While the Fed, with its back increasingly closer to the wall, is likely to put a damper on the market's ability to rally to new heights of excess, it will not be alone in dousing the bright eyed hopes of those pining for a repeat of December's parabolic stock market rally--the stock market itself could be its own worst enemy at this point.

The major averages may have staged an impressive comeback rally yesterday, and scored a few technical brownie points, but underneath the outer glow lurked a patient gasping for air. Yesterday's Dow romp was accompanied by a new low in the advance/decline line, a continued breakdown in the Transports (with the Dow Transports closing at its lowest level since October 14, 1998), and a sharp drop by the Russell 2000 (with the widely followed smallcap average crossing below its 21-day moving average)--in short, after watching yesterday's action, bad breadth is back in vogue as a topic of conversation in the hallowed halls of the Worrywort Club.

Perhaps a larger thorn in the market's side at this point than bad breadth is the stock market's close relationship with our old friend the wealth effect: stocks soar, consumers go on a binge, and the Fed is forced to continue working until the cycle goes into remission--causing pain all around.

In the words of noted market analyst Yogi Berra, "It ain't over 'till its over"--if the Fed's words tomorrow inspire the troops to get back on board the ship of euphoria, the journey to the end of the rate hike rainbow could stretch into the second half of the year, and the stock market could find itself with nowhere to go but down....with signs of inflationary pressures building and the Fed running out of time, the market's old friends "buying on the dips" and "v-shaped bottoms" could be setting it up for a fall.